Friendly PBOC Cheers Money Markets, Even Without RRR Cut

Every year, China’s interbank market is tested by demand for cash ahead of the Chinese New Year holiday. However, this year should be smoother than most, because of the late holiday in mid-February, a friendlier PBOC, and slower government bond issuance. The central bank can likely manage pre-holiday cash demand with liquidity injections via open market operations (OMO) and the medium-term lending facility (MLF). Market expectations of an across-the-board cut to banks’ reserve requirements are probably too optimistic. On a longer horizon, the PBOC needs to cut deposit and funding rates further as managing debt will become a more pressing task than maintaining economic growth, especially in a deflationary environment.

Posted January 14, 2021
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